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Waiting for Wall Street

As Congress considers a national health-care overhaul partly financed through a millionaire's tax, combined rates on New York's wealthiest citizens could reach an astonishing 57 percent. While some may not be inclined to sympathy for New York's richest residents, because of the city's steeply progressive income taxes, about half of city and nearly 40 percent of state revenues come from just the top 1 percent of income earners. The fate of so many in the bloated public sector depends on so few in the down and out private sector.

Both Albany and Gotham have a history of spending lavishly on public sector jobs and pension commitments during flush times, while cutting vital services and borrowing heavily in lean times. Measures that would sustain middle-class jobs (manufacturing, as recently as the early '70s, represented a quarter of New York's jobs) have not figured prominently in public policy. Rather, politicians have bided their time until Wall Street came roaring back in a gusher of capital gains.

The question policy makers and citizens should be asking is, what if that doesn't happen again this time -- or at least soon enough to keep the economy from permanently losing altitude?

The question is particularly salient today when the parlous state of public finance in New York describes much of the country. California has also been subject to the whiplash of boom and bust, with the gusher of Silicon Valley wealth followed by the hangover of $72 billion in state debt rated just above junk. Meanwhile, the state continues to pay pensions of over $100,000 annually to over 5,000 retirees, including retired Vernon city administrator Bruce Malkenhorst, who tops the list at close to $500,000 a year -- even though he remains under indictment for embezzlement of public funds.

Such problems are by no means confined to the coasts. Columbus, Ohio mayor Michael Coleman, whose city faces a $100 million shortfall next year, is cutting back on trash pickup and sidewalk repair and planning to lay off police officers and firefighters if voters do not approve a 25 percent hike in the city's income tax. Cities like Columbus are having a tougher time getting aid from strapped states. And much of the federal stimulus money has gone to pay for Medicaid and social welfare programs that were expanded during the boom years, or to burgeoning unemployment claims, rather than to "shovel-ready" infrastructure programs that promote job creation.

We are now at a time when the problems of public finance -- from public pensions to trillion dollar federal deficits to the Fed's full-time money printing -- are impinging heavily on private finance. Will Wall Street come to the rescue this time? Don't forget that some of our biggest financial companies are operating today only because of the federal bailout, and market gains may be nothing more than a bailout-created bubble. The motor of growth has moved to the Orient. Repairing our own stalled economy won't be as easy or as quick as in the past.